MGAB03

Introduction to Managerial Accounting

FINAL EXAM PRACTICE QUESTIONS

Multiple Choice Questions

Q1) Which of the following statements is not true?

a) Unavoidable cost is relevant in decision-making.
b) Avoidable cost is relevant in decision-making.
c) Additional investment is relevant in decision-making
d) Cost saving is relevant in decision-making

For Q2 and Q3 use the following information

KEI Ltd. had the following data for the first six months of 2012:
Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada 1
www.utsc.utoronto.ca/mgmt
 Month Machine Hours Maintenance Cost
January 2,150 $ 21,400
February 2,100 $ 21,400
March 2,400 $ 24,850
April 2,800 $ 27,700
May 2,800 $ 27,500
June 2,500 $ 24,100

Q2) What is the variable cost?

a) $8.71
b) $9.00
c) $9.38
d) $9.69
Answer: B. High-Low method ($27,700 - $21,400) / (2,800 – 2,100) = $9.00 variable costs

Q3) What is the cost function for the maintenance cost?

a) Y = $ 562 + 9.69X
b) Y = $1,223 + 9.38X
c) Y = $2,500 + 9.00X
d) Y = $3,100 + 8.71X
Answer: C. $27,700 - ($9.00 * 2,800) = $2,500 fixed costs; Y = $2,500 * 9.00X

Q4) The Puppet Co. has the following unit and mix data:
Do Dah Total
Unit sales price $5.00 $4.00
Unit contribution margin 0.75 0.60
Sales mix ($) 80% 20%
Fixed costs $99,000
Target profit 24,750

How many units in total must be sold to earn the target profit?
a) 687,500
b) 165,000
c) 112,500
d) 171,875
Answer: D. (99,000 + 24,750) / (0.75 * 0.8 + 0.6 * 0.2) = 171,875

2
Q5) Terry’s Donut Shop had the following activity for December:
Total donuts sold 17,000
Total revenues $595,000
Total fixed costs 99,000
Total variable costs 357,000

What was Terry’s margin of safety, in dollars?

a) $430,000
b) $247,500
c) $347,500
d) $357,000
Answer: C.
CM = 595,000 - 357,000 = 238,000
CM Ratio = 238,000 / 595,000 = 0.4
B.E. Sales = 99,000 / 0.4 = 247,500
Margin of Safety = 595,000 – 247,500 = 347,500

Q6) Chisholm Co. has a contribution margin ratio of 40% and a breakeven point of $200,000 in sales.
If the firm reports net income of $50,000 after taxes of 50%, what were total sales for the year?

a) $450,000
b) $466,667
c) $500,000
d) $700,000

Answer: A. [(200,000 * 0.4) + 50,000 / (1 – 0.5)] / 0.4 = 450,000

Q7) Allen, Inc. has budgeted $120,000 in variable overhead and $72,000 in fixed overhead for the
current month. 8,000 custom units were expected to be produced using 60,000 machine hours. During
the month, Allen actually used 68,096 machine hours and produced 8,960 units. Actual overhead costs
were: $132,000 variable and $73,600 fixed.

Assume Allen uses a normal costing system. The variable overhead allocated would be:
a) $136,192
b) $132,000
c) $134,400
d) $120,000

Answer: A. (120,000 / 60,000) * 68,096 = 136,192

Q8) Bits of direct material left over from normal manufacturing processes are called:

a) Scrap
b) Normal spoilage
c) Abnormal spoilage

3
d) Rework

Q9) Which of the steps listed below normally occurs first when assigning costs in an ABC system?

a) Assign costs to activity-based pools

b) Allocate activity costs to each cost object
c) Identify activities
d) Identify the relevant cost object

Q10) Flowing Wells Corporation is preparing its annual budget. As part of its analysis of the
contribution of individual products to overall profitability, the controller estimates the amount of
overhead that should be assigned to the individual product lines. Budgeted inspection costs are $4,800.
Additional information is as follows:
Small Pumps Large Pumps
Units inspected 120 120
Hours spent inspecting 2.5 17.5
Direct labour hours per unit 2 2

Under activity-based costing (ABC), the inspection cost assigned to one small pump would be:
a) $2.50
b) $5.00
c) $12.50
d) $10.00

Answer: B.
Total Inspection hours = 2.5 + 17.5 = 20
Cost per hour = 4,800 / 20 = 240
Inspection cost (small pump) = (240 * 2.5) / 120 = 5

Q11) Costs assigned to an activity pool for teaching children to swim at the regional park are $2,700
per month. Number of students is chosen as the cost driver. On average, 300 students take swim
lessons monthly. What is the ABC allocation rate for this activity?

a) Not enough information given

b) $27.00
c) $9.00
d) $0.90

Answer: C. 2,700 / 300 = 9

Q12) Which costs are least likely to be allocated to units under ABC?

a) Facility-sustaining costs
b) Batch-level costs
c) Product-sustaining costs
d) Unit-level costs

Q13) Ritz Company expects to sell 24,000 units of finished goods over the next 6-month period. The
company has 10,000 units on hand and its managers want to have 14,000 units on hand at the end of
the period. To produce one unit of finished product, two units of direct materials are needed. Ritz has
4
100,000 units of direct material on hand and has budgeted for an ending inventory of 110,000 units.

What is the number of finished units to be produced?

a) 38,000
b) 28,000
c) 20,000
d) 24,000

Answer: B. Units to be Produced = 24,000 + 14,000 − 10,000 = 28,000

Q14) Bend Company’s projected sales budget for the next four months is as follows:
Units
January 70,000
February 90,000
March 55,000
April 65,000
Beginning inventory for the year is 27,000 units. Ending inventory for each month should be 30% of
the next month’s sales.

How many units should the company produce in January?

a) 106,000
b) 90,000
c) 70,000
d) 78,000
Answer: C.
Desired Ending Inventory = 0.30 * 90,000 = 27,000
Units to be Produced = 70,000 + 27,000 – 27,000 = 70,000

Q15) To overcome possible problems with budgets that are developed only by top level managers, an
alternative is to use:

a) Mandatory budgets
b) Authoritative budgets
c) Flexible budgets
d) Participative budgets

Q16) A firm that manufactures vases has budgeted production for the next four months as follows:
Units Produced
October 40,000
November 50,000
December 30,000
January 40,000

5
Each vase requires 30 grams of silica. The managers desire an ending inventory sufficient to meet 25%
of the next month’s production. There is no beginning inventory of raw material in October.
Budgeted purchases of silica in grams for November would be:

a) 450,000
b) 1,650,000
c) 1,350,000
d) 900,000

Answer: C.
Desired Ending Inventory = 0.25 * 30,000 * 30 = 225,000 grams
Beginning Inventory November =0.25 * 50,000 * 30 = 375,000 grams
To be Purchased = 1,500,000 + 225,000 − 375,000 = 1,350,000 grams

Q17) ATR Corporation’s budgeted product costs for the third quarter of 20x6 were based on an
expected volume of 1,500 units. The budgeted unit costs appear below:
Direct material $ 1.50
Direct labour 2.25
Variable overhead 4.25
Fixed overhead 3.00
Total $11.00

ATR’s total budgeted product cost for the third quarter of 20x6 was:
a) $16,500
b) $12,000
c) $4,500
d) None of the above

Answer: A.
Budgeted Product Cost = 11 * 1,500 = 16,500

Q18) Burkett Company uses a standard cost system. Indirect costs were budgeted at $200,000 plus $15
per direct labour hour. The overhead rate is based on 10,000 hours. Actual results were:
Standard direct labour hours 9,000
Actual direct labour hours 10,000
Fixed overhead $190,000
Variable overhead $185,000

The fixed overhead production volume variance was:

a) $15,000 F
b) $20,000 U
c) $10,000 F
d) $10,000 U

Answer: B.
OH rate = 200,000 / 10,000 = 20 per hour

6
Applied Fixed OH = 20 * 9,000 = 180,000
Fixed OH Volume Variance = 200,000 – 180,000 = 20,000 U

Q19) Which of the following is not a typical step in variance analysis?

a) Calculate variances
b) Identify reasons for variances
c) Report variances in financial statements
d) Draw conclusions and take action

Q20) Everett, Inc. budgeted $1,488,000 for total overhead. The standard variable overhead rate was $2
per direct labour hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labour
hours. During the year 220,000 units were produced. Fixed overhead costs incurred were $300,000.
The variable overhead budget variance was $19,800 unfavourable, and the actual variable overhead
rate was $2.10 per direct labour hour.

The actual variable overhead costs incurred were:

a) $1,339,800
b) $1,320,000
c) $1,260,000
d) $1,300,200

Q21) Duncan Co. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials
$8, direct labour $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to
accept a special order for 40,000 units just received. Selling costs associated with this order would be
$3 per unit.

The minimum selling price per unit should be:

a) $24
b) $30
c) $32
d) $36

Answer: B.
Variable Overhead = 12 * 0.75 = 9
Variable Cost Per Unit = 8 + 10 + 9 + 3 = 30

Q22) Managers should discontinue a business if its contribution margin is less than the sum of:

a) Relevant fixed costs and opportunity costs

b) Relevant fixed costs and sunk costs
c) Relevant opportunity costs and sunk costs
d) Relevant opportunity costs and profits

Q23) Walter borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next
four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to
be paid at the end of the fifth year?

7
a) $3,926.00
b) $6,924.16
c) $5,869.65
d) $2,000.00

Answer: B.
Remaining balance = [10,000 * (1 + 0.12)^4 – (2,000 / 0.12) * ((1 + 0.12)^4) – 1)] * 1.12 = 6,924.16

Q24) Alien Corp. is considering the purchase of a new truck which costs $14,340. The truck is
expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost
savings be and still provide a 15% return? Ignore income taxes.

a) $5,967
b) $475
c) $7,458
d) $3,441

Answer: D.
A = (14,340 * 0.15) / (1 – (1.15^(-7))) = 3,441

Q25) Which of the following statements regarding NPV analysis is true?

a) Uncertainties increase as the dollar value of an investment increases

b) The discount rate can be calculated with certainty if it is based on the weighted average cost of
capital
c) Managers should generally accept projects with an NPV greater than zero
d) The timing of incremental revenues and costs is irrelevant in NPV analysis

Q26) A business segment that has responsibility for both revenues and expenses is called a(n)

a) Administrative centre
b) Investment centre
c) Profit centre
d) Revenue centre

Q27) Budgets can be used to evaluate managerial performance in:

I. Cost centres
II. Profit centres
III. Investment centres

a) II only
b) I and II only
c) II and III only
d) I, II, and III

Q28) Financial and nonfinancial indicators are used to assess organizational performance and
effectiveness under which of the following approaches?

8
a) Balanced budget
b) Balanced scorecard
c) Variance analysis
d) Performance financial statement

Q29) The balanced scorecard’s internal business processes perspective is immediately supported by
which other perspective?

a) Learning and growth

b) Innovation
c) Customer
d) Financial